A seller charging competing buyers different prices for the same “commodity” or discriminating in the provision of “allowances” — compensation for advertising and other services — may be violating the Robinson-Patman Act. This kind of price discrimination may give favored customers an edge in the market that has nothing to do with their superior efficiency. Price discriminations are generally lawful, particularly if they reflect the different costs of dealing with different buyers or are the result of a seller’s attempts to meet a competitor’s offering.
The Supreme Court has ruled that price discrimination claims under the Robinson-Patman Act should be evaluated consistent with broader antitrust policies. In practice, Robinson-Patman claims must meet several specific legal tests:
- The Act applies to commodities, but not to services, and to purchases, but not to leases.
- The goods must be of “like grade and quality.”
- There must be likely injury to competition (that is, a private plaintiff must also show actual harm to his or her business).
- Normally, the sales must be “in” interstate commerce (that is, the sale must be across a state line).
Competitive injury may occur in one of two ways. “Primary line” injury occurs when one manufacturer reduces its prices in a specific geographic market and causes injury to its competitors in the same market. For example, it may be illegal for a manufacturer to sell below cost in a local market over a sustained period. Businesses may also be concerned about “secondary line” violations, which occur when favored customers of a supplier are given a price advantage over competing customers. Here, the injury is at the buyer’s level.
The necessary harm to competition at the buyer level can be inferred from the existence of significant price discrimination over time. Courts may be starting to limit this inference to situations in which either the buyer or the seller has market power, on the theory that, for example, lasting competitive harm is unlikely if alternative sources of supply are available.
There are two legal defenses to these types of alleged Robinson-Patman violations: (1) the price difference is justified by different costs in manufacture, sale, or delivery (e.g., volume discounts), or (2) the price concession was given in good faith to meet a competitor’s price.
The Robinson-Patman Act also forbids certain discriminatory allowances or services furnished or paid to customers. In general, it requires that a seller treat all competing customers in a proportionately equal manner. Services or facilities covered include payment for or furnishing advertising or promotional allowances, handbills, catalogues, signs, demonstrations, display and storage cabinets, special packaging, warehousing facilities, credit returns, and prizes or free merchandise for promotional contests. The cost justification does not apply if the discrimination is in allowances or services furnished. The seller must inform all of its competing customers if any services or allowances are available. The seller must allow all types of competing customers to receive the services and allowances involved in a particular plan or provide some other reasonable means of participation for those who cannot use the basic plan. A more detailed discussion of these promotional issues can be found in the FTC’s Fred Meyer Guides.
Fred Meyer Guides
Electronic Code of Federal Regulations
Under certain circumstances, a buyer who benefits from the discrimination may also be found to have violated the Act, along with the seller who grants the discrimination, if the buyer forced, or “induced,” the seller to grant a discriminatory price.
Although proof of a violation of the Robinson-Patman Act often involves complex legal questions, businesses should keep in mind some of the basic practices that may be illegal under the Act. These include:
- below-cost sales by a firm that charges higher prices in different localities, and that has a plan of recoupment;
- price differences in the sale of identical goods that cannot be justified on the basis of cost savings or meeting a competitor’s prices; or
- promotional allowances or services that are not practically available to all customers on proportionately equal terms.
Under the Nonprofit Institutions Act, eligible nonprofit entities may purchase — and vendors may sell to them — supplies at reduced prices for the nonprofit’s own use, without violating the Robinson-Patman Act. The Health Care Services & Products Division issued a recent advisory opinion discussing the application of this exemption to pharmaceutical purchases by a nonprofit health maintenance organization.
Q: I operate two stores that sell compact discs. My business is being ruined by giant discount chains that sell their products for less than my wholesale cost. What can I do?
A: Discount chains may be able to buy compact discs at a lower wholesale price because it costs the manufacturer less, on a per-unit basis, to deal with large-volume customers. If so, the manufacturer may have a “cost justification” defense to the differential pricing and the policy would not violate the Robinson-Patman Act.
Q: One of my suppliers is selling parts at its company-owned store at retail prices that are below the wholesale price that it charges me for the parts. Isn’t this illegal?
A: The transfer of parts from a parent to its subsidiary generally is not considered a “sale” under the Robinson-Patman Act. Thus, this situation would not have the required element of sales to two or more purchasers at different prices.
Section 7 of the Clayton Act prohibits mergers and acquisitions when the effect “may be substantially to lessen competition, or to tend to create a monopoly.” The key question the agency asks is whether the proposed merger is likely to create or enhance market power or facilitate its exercise. The greatest antitrust concern arises with proposed mergers between direct competitors (horizontal mergers). The FTC and the DOJ have developed Horizontal Merger Guidelines that set out the agencies’ analytical framework for answering that key question, and have provided a Commentary on the Horizontal Merger Guidelines that provides many specific examples of how those principles have been applied in actual mergers reviewed by the agencies.
Merger law is generally forward-looking: it bars mergers that may lead to harmful effects. The premerger notification requirements of the Hart-Scott-Rodino Act allow the antitrust agencies to examine the likely effects of proposed mergers before they take place. This advance notice avoids the difficult and potentially ineffective “unscrambling of the eggs” once an anticompetitive merger has been completed. The agencies also investigate some completed mergers that subsequently appear to have harmed customers.
Each year, the FTC and Department of Justice review over a thousand merger filings. Fully 95 percent of merger filings present no competitive issues. For those deals requiring more in-depth investigation, the FTC has developed Merger Best Practices to help streamline the merger review process and more quickly identify deals that present competitive problems. For those, it is often possible to resolve competitive concerns by consent agreement with the parties, which allows the beneficial aspects of the deal to go forward while eliminating the competitive threat. In a few cases, the agency and the parties cannot agree on a way to fix the competitive problems, and the agency may go to federal court to prevent the merger pending an administrative trial on the merits of the deal.
By law, all information provided to, or obtained by, the agencies in a merger investigation is confidential, and the agencies have very strict rules against disclosing it. These rules prevent the agencies from even disclosing the existence of an investigation. In some situations, however, the parties themselves may announce their merger plans, and the FTC may then confirm the existence of an investigation.
Premerger Notification and the Merger Review Process
Steps in the Merger Review Process
Step One: Filing Notice of a Proposed Deal
Not all mergers or acquisitions require a premerger filing. Generally, the deal must first have a minimum value and the parties must be a minimum size. These filing thresholds are updated annually. In addition, some stock or asset purchases are exempt, as are purchases of some types of real property. For further help with filing requirements, see the FTC’s Guides to the Premerger Notification Program. There is a filing fee for premerger filings.
For most transactions requiring a filing, both buyer and seller must file forms and provide data about the industry and their own businesses. Once the filing is complete, the parties must wait 30 days (15 days in the case of a cash tender offer or a bankruptcy) or until the agencies grant early termination of the waiting period before they can consummate the deal.
Step Two: Clearance to One Antitrust Agency
Parties proposing a deal file with both the FTC and DOJ, but only one antitrust agency will review the proposed merger. Staff from the FTC and DOJ consult and the matter is “cleared” to one agency or the other for review (this is known as the “clearance process”). Once clearance is granted, the investigating agency can obtain non-public information from various sources, including the parties to the deal or other industry participants.
Step Three: Waiting Period Expires or Agency Issues Second Request
After a preliminary review of the premerger filing, the agency can:
- terminate the waiting period prior to the end of the waiting period (grant Early Termination or “ET”);
- allow the initial waiting period to expire; or
- issue a Request for Additional Information (“Second Request”) to each party, asking for more information.
If the waiting period expires or is terminated, the parties are free to close their deal. If the agency has determined that it needs more information to assess the proposed deal, it sends both parties a Second Request. This extends the waiting period and prevents the companies from completing their deal until they have “substantially complied” with the Second Request and observed a second waiting period. A Second Request typically asks for business documents and data that will inform the agency about the company’s products or services, market conditions where the company does business, and the likely competitive effects of the merger. The agency may conduct interviews (either informally or by sworn testimony) of company personnel or others with knowledge about the industry.
Step Four: Parties Substantially Comply with the Second Requests
Typically, once both companies have substantially complied with the Second Request, the agency has an additional 30 days to review the materials and take action, if necessary. (In the case of a cash tender offer or bankruptcy, the agency has 10 days to complete its review and the time begins to run as soon as the buyer has substantially complied.) The length of time for this phase of review may be extended by agreement between the parties and the government in an effort to resolve any remaining issues without litigation.
Step Five: The Waiting Period Expires or the Agency Challenges the Deal
The potential outcomes at this stage are:
- close the investigation and let the deal go forward unchallenged;
- enter into a negotiated consent agreement with the companies that includes provisions that will restore competition; or
- seek to stop the entire transaction by filing for a preliminary injunction in federal court pending an administrative trial on the merits.
Unless the agency takes some action that results in a court order stopping the merger, the parties can close their deal at the end of the waiting period. Sometimes, the parties will abandon their plans once they learn that the agency is likely to challenge the proposed merger.
In many merger investigations, the potential for competitive harm is not a result of the transaction as a whole, but rather occurs only in certain lines of business. One example would be when a buyer competes in a limited line of products with the company it seeks to buy. In this situation the parties may resolve the concerns about the merger by agreeing to sell off the particular overlapping business unit or assets of one of the merging parties, but then complete the remainder of the merger as proposed. This allows the procompetitive benefits of the merger to be realized without creating the potential for anticompetitive harm. Many merger challenges are resolved with a consent agreement between the agency and the merging parties.
Market analysis starts with the products or services of the two merging companies. In the case of a horizontal merger, the companies have products or services that customers see as close substitutes. Before the merger, the two companies may have offered customers lower prices or better service to gain sales from one another. After the merger, that beneficial competition will be gone as the merged firm will make business decisions regarding the products or services of both companies. The loss of competition may not matter if a sufficient number of customers are likely to switch to products or services sold by other companies if the merged company tried to increase its prices. In that case, customers view the products of other rivals to be good substitutes for the products of the merging firms and the merger may not affect adversely the competitive process with higher prices, lower quality, or reduced innovation if there is a sufficient number of competitive choices after the deal.
In the most general terms, a product market in an antitrust investigation consists of all goods or services that buyers view as close substitutes. That means if the price of one product goes up, and in response consumers switch to buying a different product so that the price increase is not profitable, those two products may be in the same product market because consumers will substitute those products based on changes in relative prices. But if the price goes up and consumers do not switch to different products, then other products may not be in the product market for purposes of assessing a merger’s effect on competition.
In some investigations, the agencies are able to explore customers’ product preferences using actual prices and sales data. For instance, when the FTC challenged the merger of Staples and Office Depot, the court relied on pricing data to conclude that consumers preferred to shop at an office superstore to buy a wide variety of supplies, even though those same products could be purchased at a combination of different retailers. The product market in that case was the retail sale of office supplies by office supply superstores. In the majority of cases, however, the agency relies on other types of evidence, obtained primarily from customers and from business documents. For instance, evidence that customers highly value certain product attributes may limit their willingness to substitute other products in the event of a price increase. In the FTC’s review of a merger between two ready-mix concretesuppliers, customers believed that asphalt and other building materials were not good substitutes for ready-mix concrete, which is pliable when freshly mixed and has superior strength and permanence after it hardens. Based on this and other evidence, the product market was limited to ready-mix concrete.
A geographic market in an antitrust investigation is that area where customers would likely turn to buy the goods or services in the product market. Competition may be limited to a small area because of the time or expense involved in buying a lower-cost product elsewhere. For instance, in a merger between two companies providing outpatient dialysis services, the FTC found that most patients were willing to travel no more than 30 miles or 30 minutes to receive kidney dialysis treatment. The FTC identified 35 local geographic markets in which to examine the effects of that merger. The FTC often examines local geographic markets when reviewing mergers in retail markets, such as supermarkets, pharmacies, or funeral homes, or in service markets, such as health care.
Shipping patterns are often a primary factor in determining the scope of a geographic market for intermediate or finished goods. In some industries, companies can ship products worldwide from a single manufacturing facility. For other products where service is an important element of competition or transportation costs are high compared with the value of the product, markets are more localized, perhaps a country or region of the country. For example, when examining the market for industrial gases, the FTC found that the cost of transporting liquid oxygen and liquid nitrogen limited customers to sources within 150 to 200 miles of their business.
There are two ways that a merger between competitors can lessen competition and harm consumers: (1) by creating or enhancing the ability of the remaining firms to act in a coordinated way on some competitive dimension (coordinated interaction), or (2) by permitting the merged firm to raise prices profitably on its own (unilateral effect). In either case, consumers may face higher prices, lower quality, reduced service, or fewer choices as a result of the merger.
A horizontal merger eliminates a competitor, and may change the competitive environment so that the remaining firms could or could more easily coordinate on price, output, capacity, or other dimension of competition. As a starting point, the agencies look to market concentration as a measure of the number of competitors and their relative size. Mergers occurring in industries with high shares in at least one market usually require additional analysis.
Market shares may be based on dollar sales, units sold, capacity, or other measures that reflect the competitive impact of each firm in the market. The overall level of concentration in a market is measured by the Herfindahl-Hirschman Index (HHI), which is the sum of the squares of the market shares of all participants. For instance, a market with four equal-sized firms has an HHI of 2500 (252 + 252 + 252 + 252). Markets with many sellers have low HHIs; markets with fewer players or those dominated by few large companies have HHIs approaching 10,000, a level indicating one firm with 100% market share. The larger the market shares of the merging firms, and the higher the market concentration after the merger, the more disposed are the agencies to require additional analysis into the likely effects of the proposed merger.
During a merger investigation, the agency seeks to identify those mergers that are likely either to increase the likelihood of coordination among firms in the relevant market when no coordination existed prior to the merger, or to increase the likelihood that any existing coordinated interaction among the remaining firms would be more successful, complete, or sustainable. Successful coordination typically requires competitors to: (1) reach an agreement that is profitable for each participant; (2) have the means to detect cheating (that is, deviations from the plan); and (3) have the ability to punish cheaters and reinstate the agreement. The coordination may take the form of an explicit agreement, such as agreeing to raise prices or reduce output, or the coordination may be achieved by subtle means — known as tacit coordination. Firms may prefer to cooperate tacitly rather than explicitly because tacit agreements are more difficult to detect, and some explicit agreements may be subject to criminal prosecution. The question is: does the merger create or enhance the ability of remaining firms to coordinate on some element of competition that matters to consumers?
Example: The FTC challenged a merger between the makers of premium rum. The maker of Malibu Rum, accounting for 8 percent of market sales, sought to buy the maker of Captain Morgan’s rums, with a 33 percent market share. The leading premium rum supplier controlled 54 percent of sales. Post-merger, two firms would control about 95 percent of sales. The Commission challenged the merger, claiming that the combination would increase the likelihood that the two remaining firms could coordinate to raise prices. Although a small competitor, the buyer had imposed a significant competitive constraint on the two larger firms and would no longer play that role after the merger. To settle claims that the merger was illegal, the buyer agreed to divest its rum business.
A merger may also create the opportunity for a unilateral anticompetitive effect. This type of harm is most obvious in the case of a merger to monopoly — when the merging firms are the only competitors in a market. But a merger may also allow a unilateral price increase in markets where the merging firms sell products that customers believe are particularly close substitutes. After the merger, the merged firm may be able to raise prices profitably without losing many sales. Such a price increase will be profitable for the merged firm if a sufficient portion of customers would switch between its products rather than switch to products of other firms, and other firms cannot reposition their products to entice customers away.
Example: The FTC challenged the merger of two makers of ultrasonic non-destructive testing (NDT) equipment used for quality control and safety purposes in many industries. For many customers, the products of the merging firms were their first and second choice, and evidence showed that the two firms were frequently head-to-head rivals. The merger would have eliminated this beneficial competition on pricing and innovation. To settle the FTC’s claim that the proposed merger was illegal, the companies agreed to divest the buyer’s NDT business.
Vertical mergers involve firms in a buyer-seller relationship — for example, a manufacturer merging with a supplier of an input product, or a manufacturer merging with a distributor of its finished products. Vertical mergers can generate significant cost savings and improve coordination of manufacturing or distribution. But some vertical mergers present competitive problems. For instance, a vertical merger can make it difficult for competitors to gain access to an important component product or to an important channel of distribution. This problem occurs when the merged firm gains the ability and incentive to limit its rivals’ access to key inputs or outlets.
Example: The FTC challenged the combination of an ethanol terminal operator and a gasoline refiner. Refiners need ethanol to create specially blended gasoline, and before the merger, an independent firm with no gasoline sales controlled access to the ethanol supply terminal. After the merger, the acquiring refiner could disadvantage its competitors in the gasoline market by restricting access to the ethanol terminal or raising the price of ethanol sold to them, which would reduce competition for sales of gasoline containing ethanol and raise prices to consumers. As part of a consent agreement, the FTC required the merged firm to create an informational firewall so there could be no preferential access or pricing for its refining affiliate.
Potential Competition Mergers
A potential competition merger involves one competitor buying a company that is planning to enter its market to compete (or vice versa). Such an acquisition could be harmful in two ways. For one thing, it can prevent the actual increased competition that would result from the firm’s entry. For another, it would eliminate the procompetitive effect that an outside firm can have on a market simply by being recognized as a possible entrant. What accounts for that effect? The firms already in the market may avoid raising prices to levels that would make the outside firm’s entry more likely. Eliminating the potential entrant through a merger would remove the threat of entry and possibly lead to higher prices.
Example: The FTC has challenged a number of mergers between pharmaceutical companies where one firm is already in the market with an-FDA approved drug and the second company has a drug that is in the approval process and could compete once it is approved. Mergers of this type eliminate a future competitor and further delay price competition for certain drugs.
Entry and Efficiencies
If a merger creates opportunities for the merged firm to raise price, other firms may be enticed to enter the market after the merger. This entry — if it is timely, likely and sufficient — may counteract the harmful effects of the merger and make enforcement action unnecessary. Under certain conditions, even the possibility of new firms entering the market will keep prices in check. On the other hand, many factors can impede entry: licensing restrictions, zoning regulations, patent rights, inadequate supply sources, and cost of capital, among others. Entry may also take a long time, and consumers would be paying higher prices all that time. And, finally, the new firm may fail to attract customers away from existing firms, particularly in markets where existing firms have a proven track record. Assessing entry conditions calls for intensive fact-finding and is unique to each industry.
Example: The FTC challenged a merger between two leading U.S. makers of field-erected industrial and water storage tanks. The Commission found that although new firms had attempted to compete for customers, they lacked the reputation and experience that most customers demand and were not capable of replacing the competition lost due to the merger. The Commission ordered the company to create two separate, stand-alone divisions that would restore competition to the market.
Many mergers produce savings by allowing the merged firms to reduce costs, eliminate duplicate functions, or achieve scale economies. Firms will often pass merger-specific benefits on to consumers in the form of lower prices, better products, or more choices. The agencies are unlikely to challenge mergers when the efficiencies of the merger prevent any potential harm that might otherwise arise from the proposed merger. Theoretical cost savings would not be enough, however; they must be demonstrated. And the efficiencies must involve a genuine increase in productivity. It is not enough for cost savings to result merely from a reduction in output, or from the assertion of newfound market power against suppliers. The price reductions should result from real efficiencies in the merger and not from reducing output or service.
Example: The FTC reviewed a proposed merger between two pharmaceutical companies that sold competing drugs used with solid organ transplants to reduce the patient’s risk of rejection. The Commission found that the merger would reduce competition in the market for these life-saving drugs, and tailored a remedy to preserve competition in that market. The companies then merged to realize potential benefits in the related field of oncology treatment, where use of certain diagnostic tests could lead to more patients using these important drugs.